About Accounting

 

Rules and Procedures of Basic Accounting Principles

There is but fine line between accounting and basic accounting, although the two may seem to be one and the same. Many people may associate the term accounting with a department, an activity or a group of people who are involved in the accounting practice. Accounting, by definition, is a system that primarily measures and reports fiscal events derived from the accounting equation for decision making purposes.

On the other hand, basic accounting is defined as the application of procedures with respect to areas such as debit and credit transactions, accounts; assets and liabilities, owner’s equity, revenue and expenses as well as an accounting system that provides procedures for checking, balancing, and reconciling all financial transactions to create a transparent and accurate representation of the business’s economic condition. The ending results of basic accounting procedures are reports on profit and loss, balance sheet and income and cash flow statements. These reports are woven into significant, usable information to interested parties.

As an example, accountants determine the business’s profit and loss periodically for a month, for every quarter or fiscal year and publish these results in the form of an income statement. An income and profit statement consists primarily of accounts receivable or what is due for the business, accounts payable or what the business owes as well as retained earnings and depreciation.

Accounting entails a lot of basic bookkeeping. Bookkeeping is the process of records everyday transactions, bills, payables, expenses and income that the business earns. Liabilities are also summarized in what is known as double-entry bookkeeping. Most businesses want to higher amount of assets in order to offset the liabilities and show a profit. Bookkeeping is necessary in order for the business to know how it is faring fiscally.

However, business owners or big-time shareholders are more concerned with the summaries of transactions that are reflected in the financial statement. Simply put, a financial statement is the wrap-up of the business’s assets, wherein an asset is valued at its purchase cost. It also records the sources of these assets. Examples of a business’s assets are loans payable and profit.

These procedures can be performed using a particular type of accounting system. A business cannot just come up with their own system and use it to carry out these procedures; otherwise it could lead to errors. Accountants generally follow rules stipulated in the GAAP, or Generally Accepted Accounting Procedures. This is a duly recognized set of accounting principles, standards, and procedures that are authoritatively set by a board of accountants and policymakers.